Friday, October 03, 2003

Protectionism? Stephen Roach

Commentary from one of America's premiere economists at Morgan Stanley:

America's Political Gambit
Stephen Roach

.........The currency lever does address one aspect of America’s job shortfall. Taken to its extreme, it has the potential to affect relative cost comparisons between domestic and foreign labor input. But problems arise with respect to both long lags and the order of magnitude of the dollar depreciation required to make US labor rates more attractive. Those shortcomings of the “weak-dollar cure” are what have opened the door to the dangerous alternative of protectionism. Politicians believe it is now up to them to take explicit action to deal with unfair competitive pressures that are impeding US job creation. Both houses of the US Congress have already taken such initiatives, targeting China and its currency policy as the culprit. Senate legislation to impose steep tariffs on China has six co-sponsors, and a comparable bill in the House has over 60 co-sponsors. Lacking the patience to wait for market-based currency realignments to rebalance the world, America’s short-sighted politicians have made China bashing the new sport in this jobless recovery.

Where this stops is anyone’s guess. But unless there is quick and meaningful relief on the US job front, pressures for the political fix will only grow. The most worrisome aspect of this possibility is that there is no effective counterweight anywhere in the political spectrum. That is not the way politics normally work in America. Usually, Congress threatens to go over the cliff and the White House steps in at the last minute and prevents disaster. The Reagan administration’s resistance to Japan bashing in the 1980s is a classic example of how these checks and balances work. That’s not the case today. Political support for actions against China is broad-based -- by party, ideology, and geography. Nor does today’s White House seem philosophically and pragmatically prepared to take a stand in opposition to such actions. Indeed, by leading the charge on steel tariffs in 2002, the Bush administration has already laid its protectionist cards on the table.

In a jobless recovery -- and this one is unlike anything the modern-day US economy has ever experienced -- politics take on a new importance in shaping financial market outcomes. For America and the rest of this US-centric world, I fear the political gambit has only just begun. ...{article link continued}

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